Free To Choose: a personal Statement

The Anatomy of Crisis
79
foreseen at the time—the first step in a greatly speeded-up trans-
fer of power from the private market to government, and from
local and state government to Washington.
THE ONSET OF DEPRESSION
The popular view is that the depression started on Black Thurs-
day, October 24,
1929,
when the New York stock market col-
lapsed. After several intermediate ups and downs, the market
ended up in
1933
at about one-sixth the dizzying level of
1929.
The stock market crash was important, but it was not the be-
ginning of the depression. Business activity reached its peak in
August
1929,
two months before the stock market crashed, and
had already fallen appreciably by then. The crash reflected the
growing economic difficulties plus the puncturing of an unsus-
tainable speculative bubble. Of course, once the crash occurred,
it spread uncertainty among businessmen and others who had
been bemused by dazzling hopes of a new era. It dampened the
willingness of both consumers and business entrepreneurs to
spend and enhanced their desire to increase their liquid reserves
for emergencies.
These depressing effects of the stock market crash were strongly
reinforced by the subsequent behavior of the Federal Reserve
System. At the time of the crash, the New York Federal Reserve
Bank, almost by conditioned reflex instilled during the Strong
era, immediately acted on its own to cushion the shock by pur-
chasing government securities, thereby adding to bank reserves.
That enabled commercial banks to cushion the shock by pro-
viding additional loans to stock market firms and purchasing se-
curities from them and others affected adversely by the crash.
But Strong was dead, and the Board wanted to establish its lead-
ership. It moved rapidly to impose its discipline on New York,
and New York yielded. Thereafter the System acted very dif-
ferently than it had during earlier economic recessions in the
1920s. Instead of actively expanding the money supply by more
than the usual amount to offset the contraction, the System
allowed the quantity of money to decline slowly throughout 1930.
Compared to the decline of roughly one-third in the quantity of

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FREE TO CHOOSE: A Personal Statement
money from late 1930 to early 1933, the decline in the quantity
of money up to October 1930 seems mild—a mere 2.6 percent.
However, by comparison with past episodes, it was sizable. In-
deed, it was a larger decline than had occurred during or pre-
ceding all but a few of the earlier recessions.
The combined effect of the aftermath of the stock market crash
and the slow decline in the quantity of money during 1930 was a
rather severe recession. Even if the recession had come to an end
in late 1930 or early 1931, as it might well have done if a mon-
etary collapse had not occurred, it would have ranked as one of
the most severe recessions on record.
BANKING CRISES
But the worst was yet to come. Until the autumn of 1930 the
contraction, though severe, was not marred by banking difficulties
or runs on banks. The character of the recession changed drasti-
cally when a series of bank failures in the Middle West and South
undermined confidence in banks and led to widespread attempts
to convert deposits into currency.
The contagion finally spread to New York, the financial center
of the country. The critical date is December 11, 1930, when
the Bank of United States closed its doors. It was the largest
commercial bank that had ever failed up to that time in U.S.
history. In addition, although it was an ordinary commercial
bank, its name led many at home and abroad to regard it as an
official bank. Its failure was therefore a particularly serious blow
to confidence.
It was something of an accident that the Bank of United States
played such a key role. Given the decentralized structure of the
U.S. banking system plus the policy that the Federal Reserve
System was following of letting the money stock decline and not
responding vigorously to bank failures, the stream of minor
failures would sooner or later have produced runs on other major
banks. If the Bank of United States had not failed when it did,
the failure of another major bank would have been the pebble
that started the avalanche. It was also an accident that the Bank
of United States itself failed. It was a sound bank. Though

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The Anatomy of Crisis
81
liquidated during the worst years of the depression, it ended up
paying off depositors 92.5 cents on the dollar. There is little
doubt that if it had been able to weather the immediate crisis, no
depositor would have lost a cent.
When rumors started to spread about the Bank of United
States, the New York State Superintendent of Banks, the Federal
Reserve Bank of New York, and the New York Clearing House
Association of Banks tried to devise plans to save the bank,
through providing a guarantee fund or merging it with other
banks. This had been the standard pattern in earlier panics. Until
two days before the bank closed, these efforts seemed assured of
success.
The plan failed, however, primarily because of the particular
character of the Bank of United States plus the prejudices of the
banking community. The name itself, because it appealed to im-
migrants, was resented by other banks. Far more important, the
bank was owned and managed by Jews and served mostly the
Jewish community. It was one of a handful of Jewish-owned
banks in an industry that, more than almost any other, has been
the preserve of the well-born and well-placed. By no accident,
the planned rescue involved merging the Bank of United States
with the only other major bank in New York City that was largely
owned and run by Jews, plus two much smaller Jewish-owned
banks.
The plan failed because the New York Clearing House at the
last moment withdrew from the proposed arrangement—pur-
portedly in large part because of the anti-Semitism of some of the
leading members of the banking community. At the final meeting
of the bankers, Joseph A. Broderick, then the New York State
Superintendent of Banks, tried but failed to get them to go along.
"I said," he later testified at a court trial,
it [the Bank of United States] had thousands of borrowers, that it
financed small merchants, especially Jewish merchants, and that its
closing might and probably would result in widespread bankruptcy
among those it served. I warned that its closing would result in the
closing of at least 10 other banks in the city and that it might even
affect the savings banks. The influence of the closing might even ex-
tend outside the city, I told them.

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FREE TO CHOOSE: A Personal Statement
I reminded them that only two or three weeks before they had
rescued two of the largest private bankers of the city and had will-
ingly put up the money needed. I recalled that only seven or eight
years before that they had come to the aid of one
of
the biggest trust
companies in New York, putting up many times the sum needed to